How the Natural Resources Business Is Turning into a Technology Industry

Executive Summary

Historically, the resources sector followed a dig-and-deliver model, where success was mainly about the size and quality of assets. For example, the oil industry depended on having the most plentiful reserves. Demand for resources grew in line with the economy and it paid to have the best and most expandable asset. But that’s no longer the case. How producers manage the resources they have is far more important than how much they have. Consider how the dynamics of demand are changing. The adoption of robotics, Internet of Things technology, and data analytics — along with macroeconomic trends and changing consumer behavior — are fundamentally transforming the way resources are consumed. Technology is enabling people to use energy more efficiently in their homes, offices, and factories. At the same time, technological innovation in transportation, the largest single user of oil, is helping to lower consumption of energy as engines become more fuel-efficient and the use of autonomous and electric vehicles grows. As a result, demand for resources is flattening out. At the McKinsey Global Institute, we modeled these trends and found that peak demand for major commodities like oil, thermal coal, and iron ore is in sight and may occur as soon as 2020 for coal and 2025 for oil.

Automated haul trucks and drilling machines are being tested in mines across the world. Sensors at the tip of drill bits are measuring ore grade in real time, and data analytics is being used to discover new deposits of precious metals. In oil and gas, underwater robots fix gas pipelines off the coast and drones inspect offshore oil rigs. Crawling well-drilling machines drill multiple wells quickly and accurately one after another. These are just some of the many ways technology is transforming the demand and supply of resources.

Historically, the resources sector followed a dig-and-deliver model, where success was mainly about the size and quality of assets. For example, the oil industry depended on having the most plentiful reserves. Demand for resources grew in line with the economy, and it paid to have the best and most expandable asset. But that’s no longer the case. How producers manage the resources they have is far more important than how much they have.

Today tech is the new oil, and it’s changing the game for producers of major commodities such as oil, coal, iron ore, natural gas, and copper. In this new commodity landscape, incumbents and attackers will race to develop viable business models, and not everyone will win.

Consider how the dynamics of demand are changing. The adoption of robotics, internet-of-things technology, and data analytics — along with macroeconomic trends and changing consumer behavior — are fundamentally transforming the way resources are consumed. Technology is enabling people to use energy more efficiently in their homes, offices, and factories. At the same time, technological innovation in transportation, the largest single user of oil, is helping to lower energy consumption as engines become more fuel efficient and the use of autonomous and electric vehicles grows.

As a result, demand for resources is flattening out. (Copper, often used in consumer electronics, is the exception.) At the McKinsey Global Institute, we modeled these trends and found that peak demand for major commodities like oil, thermal coal, and iron ore is in sight and may occur as soon as 2020 for coal and 2025 for oil. At the same time, renewable energies including solar and wind will continue to become cheaper and will play a much larger role in the global economy’s energy mix. We estimated that renewables could jump from 4% of global power generation today to as much as 36% by 2035 in our accelerated technology scenario.

According to our latest report, “Beyond the Super Cycle: How Technology Is Reshaping Resources,” less intensive use of energy and increased efficiency could potentially raise energy productivity in the global economy by 40%–70% by 2035 and unlock trillions of dollars in savings for global consumers of resources, depending on the rate of technological adoption.

Of course, a low-growth environment creates plenty of challenges for energy producers. But that’s where technology comes in. Resource producers, increasingly able to deploy a range of technologies in their operations, can access mines and wells that were once inaccessible, raise the efficiency of extraction techniques, and shift to predictive maintenance. We calculate this technological transformation of the supply of resources could unlock as much as $400 billion in productivity cost savings for producers in 2035.

Productivity-enhancing technology is already being deployed in mining operations around the world. Recent expansions in the copper industry, for example, are tapping reserves with an average ore grade of less than 1% copper, a sign of how technology can get more out of less. In another example, Rio Tinto’s mines using automation technology in the Australian Pilbara are seeing 40% increases in utilization of haul trucks, and automated drills are seeing 10%–15% improvements in utilization. In oil and gas, the most recent deep-water exploration is accessing reservoirs at depths of more than 3,000 meters, six times deeper than the deepest developments in the 1980s. And technology is being used to make the workplace safer. Statoil has developed an underwater robot system for pipeline repairs that is reducing repair times. Drones rather than people can conduct pipeline inspections and constant, real-time site surveys in oil field development.

A lot more is possible. For example, less than 1% of all data from an oil rig is used in decision making, according to our analysis. If more information was used and analyzed, that could help lower maintenance costs by moving from time-based to predictive-based maintenance routines, thus reducing the frequency of repairs and ensuring that the right repairs are done at the right time through improved diagnosis. Then there are mining-specific technologies that could enhance productivity. For low-grade ores including copper and uranium, advanced leaching techniques could increase recovery as ore grades decline. That means more copper, for instance, can be extracted even in the face of low-quality deposits. For many metals, advanced forms of crushing and grinding could result in significant improvements in recovery rates and help reduce costs such as electricity consumption.

For resource companies, particularly incumbents, navigating a future with more uncertainty and fewer sources of growth will require a focus on agility. Harnessing technology will be essential for unlocking productivity gains, but it will not be sufficient. Companies that also focus on the fundamentals — increasing throughput and driving down capital costs, spending, and labor costs — while simultaneously looking for opportunities in technology-driven areas will have an advantage.

Managing a company’s workforce will be crucial. Demand for new job classes such as data scientists, statisticians, and machine-learning specialists is already on the rise among resource producers. Within 10 years, oil and gas companies, for example, could employ more PhD-level data scientists than geologists, either in-house or through partnerships with increasingly sophisticated vendors. Meanwhile, existing roles will be redefined. For instance, the automation of repetitive technical decisions will free up engineers to focus on more-difficult analyses.

In the new technology-enabled world of resources, competition could come from anywhere, including technology leaders such as Google and Alibaba that have reached “hyperscale” in revenue, assets, customers, workers, and profits, and can move quickly into other industries. Alibaba, for example, recently started an online marketplace for crude oil tracking. To adapt to this new reality, incumbents may need to rethink what it means to be a resource producer. Size may matter less, and agility more, while future growth may come from nontraditional sources.

By harnessing new and existing technology, tomorrow’s resource leader could derive its advantage from doing more with less, moving faster, and thinking differently than in the past. While this transition won’t be easy, the rewards of greater efficiency and productivity can be great.